LONDON, March 28 (Reuters) - Emerging market borrowersissued near-record levels of debt in the first quarter, boostedby demand for high-yielding assets at the start of the year, butrising Treasury yields and high junk debt levels are cloudingthe outlook.

After a record year in 2012, when investors flooded intoemerging market debt for its magic combination of safe fixedincome asset and relatively high yield, borrowers have remainedactive.

Emerging sovereign and corporate issuers launched $124.5billion in international bonds in the period between Jan. 1 andMarch 26 2013, according to data compiled by ING, a whiskerbelow the $125.9 billion launched in the first quarter of 2012.

New issues totalled a record $444 billion last year, INGadded, with most activity in the first and fourth quarters.

Unusual offerings this quarter included a private placementfor Tanzania, the East African nation's first foray intointernational debt markets, and a hefty dollar bond for Hungary,which is trying to get by without international aid.

"We have come into a fairly strong year, at least untilpretty recently," said David Spegel, global head of emergingmarkets strategy at ING.

"Cyprus was less of a concern than Spain and certainly thanGreece - I am not sure there is a danger of a rout," saidSpegel, referring to the banking crisis in Cyprus which forcedthe island to secure a $10 billion euro bailout this week.

Investors grew upbeat on risky assets after the EuropeanCentral Bank promised last year to do whatever it took topreserve the euro, and the United States began to showincreasing signs of economic recovery.

Expectations that central banks in the developed world willcontinue to print money are likely to keep investors searchingfor higher-yielding parking spots for their funds.

However, the Cyprus bailout has dampened sentiment on theeuro zone, while the improving U.S. economy is also pushing upyields in traditionally safe-haven U.S. Treasuries, making theman attractive alternative to higher-rated emerging market debt.

The rise in U.S. Treasury yields and the dollar has hitemerging debt returns.

Returns on JP Morgan's flagship EMBI-Global index havefallen to minus 2 percent for the year, as yield premia toTreasuries are at 308 basis points, the highest since the fourthquarter of 2012.

Even local emerging debt returns dropped into the red thisweek as emerging currencies lost ground against the dollar.

"We ended last year and started this year with maximumbullishness on risky assets ... now people are up to theireyeballs in stuff like Ukraine," said David Hauner, head ofEEMEA fixed income strategy at BofA-Merrill Lynch GlobalResearch.

Hauner added that negative news from countries like Egypt,mired in an economic crisis, and Argentina, facing a possibledefault, had also deterred investors.

"We are in an environment where there is a bit ofrisk-off, and we are seeing improved U.S. data," he said. "Boththose are dollar-friendly, which is not helpful for emergingmarkets."

BofA-ML data shows $18.7 billion in sovereign debt issuancein the first quarter versus a target of $75 billion for 2013,down from $87 billion launched in 2012. The bank forecasts $268billion in hard currency debt sales by emerging marketcorporates this year, compared with $290 billion in 2012.

HIGH YIELD VS HIGH GRADE

As investors start to doubt whether investment-gradeemerging debt gives enough of a yield pickup, high-yieldborrowers have stepped in to fill the gap.

More than 40 percent of issuance has been inspeculative-grade debt this quarter, compared with 15 percent ayear ago, according to ING.

"There are incipient signs of a possible bubble but we haveseen this before and it's only lasted a quarter," Spegel said,though he added that issuance was last this junk-heavy in2006-2007, before the global financial crisis.

Paul de Noon, director for emerging markets at AllianceBernstein in New York, said gradually rising Treasury yieldsshould not pose much threat to emerging markets, while highlevels of corporate issuance just reflected a switch to debtfrom loan markets.

"Loan markets have shrunk and overall the analysis we cameup with is rates of credit in the private sector in mostemerging countries do not seem excessive."